Question

Outline and discuss functions involved in international cash management. Explain how the MNC’s optimization of cash flow can distort the profits of a subsidiary.

Answer 1

International cash management can be defined as managing the cash inflow and outflow for the operations of the entities that operate internationally with two or more countries. The functions involved in the international cash management can be divided into two parts
1. Optimizing cash flow movements- It involves having the most judicious use of the cash flows. It can be done by using techniques such as accelerating the pace of cash inflows, reducing the currency conversion costs to a minimum , managing the blocked funds and managing inter-subsidiary cash transfers.

2. Investing excess cash. The cash in excess of what is required for day to day operations should be invested in an opportunity that can be more fruitful for the organization. The management has to take steps and draft strategies that are in favour of the organization with the cash otherwise kept idle.

The MNCs usually focus on optimization of cash flow which is can prove to be a distorting exercise for the profits of a subsidiary. The process of centralised netting is used to compile the intersubsidiary cash flows of all the subsidiaries of the entity. It is aimed to reduce currency conversion costs and processing costs associated with payments between subsidiaries. This will though optimize the cash flows for the MNC but shall restrict the free flow of trade for the subsidiaries.